Strategic Trading When Agents Forecast the Forecasts of Others

ABSTRACT

We analyze a multi‐period model of trading with differentially informed traders, liquidity traders, and a market maker. Each
informed trader's initial information is a noisy estimate of the long‐term value of the asset, and the different signals received
by informed traders can have a variety of correlation structures. With this setup, informed traders not only compete with
each other for trading profits, they also learn about other traders' signals from the observed order flow. Our work suggests
that the initial correlation among the informed traders' signals has a significant effect on the informed traders' profits
and the informativeness of prices.